Text Box: ‘Explaining the Credit Crunch’ 8/9/08 Last year it was easier than ever to get on the property ladder with mortgage rates being offered of 100% and even 125%- allowing you to borrow more than the cost of your home. Today you will not find such deals, with the last being withdrawn in February, so what effect has the ‘Credit Crunch’ had on the UK Mortgage Market? Irresponsible lending in the U.S., called subprime lending to those with poor credit histories acted as the catalyst for the demise. These lending packages, financed by repackaged, more stable stock from outside investors were always likely to be risky. Inevitably such high-risk customers did default on their payments on mortgages that were too big for them- despite being encouraged to take them by the banks themselves. The resulting fact is banks are more reluctant to lend to each other (which caused Northern Rock’s demise) and therefore are finding it harder to find the finance to fund their mortgage deals. The figures speak for themselves, in June the British Bankers’ Association reported a record low of 22,369 loans for house purchases. The main consequences on the market are: - The withdrawal of the 100%+ mortgages mean it is even harder for first-time buyers - Higher levels of interest, despite a falling Bank of England base rate, as the banks try to claw back lost earnings - Higher initial deposits are now required by many lenders to access the best deals, this has risen from the usual 5% to as much as even 10% - Arrangement fees increasing, some of which have risen by 90%+ - Tighter eligibility conditions mean the banks are more picky over who and how much new business they take on The Credit Crunch has not only tightened the noose around people’s budgets by demanding more of it on food, fuel and energy but it has also caused the banks to become more prudent in their lending. Andy Hornby, 41, Chief Executive of HBOS, speaking on BBC News’s ‘Leading Questions’ gave a point of view from the banks’ perspective of the changes. “The core lesson of this is that wholesale markets are so interlinked. These are truly, truly unchartered waters. We have to face reality and prepare for contingencies.” Mr. Hornby also maintained that although there is less competition, pricing “is still competitive, compared to the rest of the World.” Banks have been hit the hardest with the likes of Barclays reporting losses of over £2billion, but what could the UK Government have done to minimize the effects of such a ticking time-bomb? David Smith, Economics Editor of the Sunday Times said he felt “few economic issues can be addressed by one country alone.” However consumers are not quite so sure. John Mayer, 28, of London who owns his own home blasted the insufficient checks and irresponsible role of the Government. He said: “They could have introduced rules to prevent the 125% mortgages and could have made a prerequisite of having securer funding than complex International packages.” And Amanda Sheridan, 31, of Croydon, South London who is currently renting said: “A lot of the financial gambles made by banks were based on scores from credit ranking agencies. These agencies would receive a fee for all referrals so for producing more approvals meant more money for them. Where’s the FSA (Financial Services Authority) when you need them?” Last week the Government issued a rather delayed response, months after the likes of Moneyfacts (independent financial experts) called for it, a reduction in Stamp Duty (a tax of 1% of the property price) from £125,000 to £175,000. Though given the average London house price is in excess of £200,000 it has been criticized as a “drop in the ocean” and “a temporary political fix” by Peter Williams, executive director of Intermediary Mortgage Lenders Association. Had tighter concessions been in place it is possible the effects could have been lessened, but most people are pointing the finger directly at the banks, Barclays for example may have lost £2billion this year but this was the bank that made over £5billion profit in the past two years. Though had the likes of the FSA been watching banks such as Northern Rock more closely it may not have needed to inject billions of public funds into it. Banks have behaved irresponsibly but clearly the Government regulators were not doing enough to stop them. About Me Blogs Articles Disclaimer News Reviews